The Reserve Bank of India (RBI) is in discussions with the Securities and Exchange Board of India (Sebi) to allow mutual funds to sell their debt to asset reconstruction companies (ARCs). 

Currently, ARCs cannot purchase debts from mutual funds. Last week, the RBI’s deputy governors, executive directors, and other officials met the chief executives of ARCs to discuss this issue. 

This development follows the recommendations of an RBI committee that suggested allowing mutual funds to sell debts to ARCs. 

The committee also recommended that ARCs acquire financial assets from all regulated entities, including AIFs, FPIs, and AMCs, making investments on behalf of MFs and all NBFCs, irrespective of asset size, and from retail investors. 

The RBI has been actively engaging with banks, non-banking financial companies (NBFCs), and cooperative banks as part of its supervisory engagements. 

Following its meeting with ARCs, the RBI issued a statement highlighting the importance of sound governance as the foundation for ARCs’ building a robust business model.

According to RBI data, sales to ARCs by banks surged in 2022-23, partly reflecting assets sold to the newly operationalised National Assets Reconstruction Company Ltd (NARCL). 

During this period, 9.7% of the previous year’s stock of scheduled commercial banks’ gross NPAs was sold to ARCs, a significant increase from the 3.2 per cent sold in 2021-22. 

The RBI reported that the acquisition cost of ARCs as a proportion to book values of assets declined from 33% at the end of March 2022 to 29.8% at the end of March 2023.